Bank of Canada cuts rates; shocks everyone!

The Bank of Canada shocked markets today by cutting its key overnight lending rate by a quarter of a percentage point, citing the economic threat posed by plunging oil prices.

"The drop in oil prices is unambiguously negative for the Canadian economy," Bank of Canada governor Stephen Poloz said in a morning news conference. "Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut."

The overnight rate, which moves down to 0.75 per cent, had been at one per cent since September 2010.

The cut would result in lower interest rates for variable rate mortgages, lines of credit and other loans that float with prime rates, but only if banks lower their prime rates.

On Wednesday evening, TD Bank confirmed to CBC News that it will not be lowering its prime interest rate in tandem with the Bank of Canada's overnight rate.

Virtually no economists had been predicting a rate cut. "It is a significant move," TD Bank economist Derek Burleton told CBC News. "It does show the Bank of Canada is worried about the big drop in the price of oil ... and what kind of uncertainty that poses in the next few quarters. I don't think they are panicking but I do think they're concerned about some of the uncertainty the recent slump in the price of oil does create for the economy."

Oil prices have plunged to less than $50 US a barrel from more than $105 US in June last year.

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